Derek Hatfield /

IRS Paid Identity Thieves $5.8 Billion in 2013, Blames Budget Cuts

Smaller budgets have prevented the agency from properly preventing identity thieves from collecting fraudulent tax returns.

The Internal Revenue Service doled out nearly $6 billion in tax returns to identity thieves in 2013, according to a new report, and the agency cited budget cuts as a reason it couldn’t conduct better oversight.

IRS paid out about one in five returns filed by identity thieves in the 2013 filing season, the Government Accountability Office found, despite an increased effort to catch the fraudsters. GAO acknowledged congressional cuts to the IRS budget have hampered the agency’s ability to stop improper payments.

“Since 2010, the agency has absorbed approximately $900 million in budget cuts while also facing an increasing workload due to legislative mandates, priority programs…and [identity theft] refund fraud,” GAO wrote.

IRS employs 3,000 people to prevent identity thieves from receiving fraudulent tax returns, but the agency has said that number is not enough. Agency officials asked for an additional $64.9 million for prevention efforts in the IRS’ fiscal 2015 budget, including money to pay for an extra 457 employees. Instead, however, Congress decided to cut an additional $346 million from the total IRS budget -- meaning its total cuts since 2010 now are $1.2 billion.

John Dalrymple, IRS’ deputy commissioner for services and enforcement, said he appreciates the “ever-evolving threat” that identity theft fraud presents, but it comes at a difficult time.

“These challenges have been met during a period when the IRS incurred substantial reductions in funding while, concurrently, preparing for and implementing major new provisions of the tax code,” Dalrymple said.

GAO recommended the IRS conduct better analysis of its fraudulent payments and improve its tools for estimating their costs. IRS said “resource constraints” have prevented the agency from properly reporting the uncertainty of its estimates, which in turns makes it more difficult to catch identity thieves. In April 2014, IRS began a pilot “return review program,” but later “paused further RRP development due to budget constraints.”

Even in accepting GAO’s suggestions, IRS hedged against the possibility it may not be able to afford the improvements. Dalrymple said his office will lay out all the options to authenticate that taxpayers requesting refunds are who they claim to be, “although the depth and scope of that analysis may be limited based on available resources.”

As has been a common argument presented by the IRS and its advocates, the IRS said in its fiscal 2015 budget request that investing in fraud prevention would lead to a very favorable return for the federal government. For every $1 invested in preventing fraudulent identity theft tax refunds, the government would save $22, IRS said.

In its fiscal 2016 budget proposal, IRS bumped up its request for identity theft and refund fraud prevention to $82 million.  

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